Nice Speech, Obama. Shame about the Facts: What's an FA to Do, Planning-Wise?

Jan 21, 2013

Yes, I am reaching back into the archives on this argument, but the point is still valid: If you have clients who are expecting their DB plans to come through during retirement or, heaven forbid, rely upon social security, whew! That's a tough bit of arithmetic to sort out how the retiree-in-waiting is going to be able to win some income in this low interest rate environment. Get out your Monte Carlo algorithms and let it roll . . . The President of These United States says not to worry; no one is going to touch Social Security or Medicare or whatever . . . out of his "cold dead hands" (miss you Charlton Hesten, you Great American, you!). Fact is the United States is going broke. Did Barry miss the message? Here is a note that I posted some many ebbs-and-tides ago, yet the point stands: How the heck can we pay for all this? In short, if your clients' retirement plan factors in Social Security, bad idea[1]. As the story says and a fact that Barry Obama seems to ignore is this: "The message is ugly, but necessary. David Walker, a former Comptroller General and head of the Government Accountability Office, told me, 'By the time today's college[2]graduates are ready to retire 40 years from now, the only things our government will be able to pay for are interest on the federal debt and some of the Social Security, Medicare and Medicaid benefits. All other parts of the federal government will be closed and out of business.'” (Peterson's nonpartisan Concord Coalition backed the film and Walker is CEO of The Peterson G. Foundation.)

THE BLOG GOES LIKE THIS:

The point of the article (Promises Will Be Broken[1]) was simple: If you have clients who are expecting pension benefits in retirement, they may want to save a little (or a lot) on their own. Forget about the short-term gyrations of the capital markets[3] or real estate[4] values. The Social Security Trust will start running a deficit in 2017. Already the government has promises worth $53 trillion in future benefits (including entitlements, from Social Security to Medicare). That works out to about $175,000 per person.

As our story noted, this is why some advisors discount the amount a pension plan is promising their clients. Who knows what a plan, private or public, will look like in a decade or more. Some advisors tell high-salaried clients to discount future annual benefits by 30 percent to 50 percent, sometimes more. The Pension Benefit Guaranty Corp., the government entity that protects American private pensions, pays about 84 percent of retirees’ benefits. But if you make “too much,” (i.e. as airline pilots do) you receive just a fraction of your promised annual benefits. Remember that you’ll need to analyze the health of your clients’ employers when creating a financial plan for them. Lots of companies have underfunded pensions—it fluctuates, often based on market performance. Fran Hawthorne, a contributing editor to Registered Rep[5]., notes in her book, Pension Dumping[6], that the absolute size of the underfunded pension doesn’t always matter. You’ll need to regard the company as you would a bond investment[7], keeping an eye on its capital structure. Hawthorne writes, “Key ratios include: pension assets to corporate assets or to market capitalization, pension contributions to cash flow or to revenue, pension liability to market capitalization or to corporate assets, pension underfunding to the size of the plan and the size of the workforce to net profit.”